What Elon Musk missed in his China tariff tweets

Elon Musk, CEO of Tesla complained on Twitter about China’s tariff on imported vehicles, which put him “competing in an Olympic race wearing lead shoes.” (Getty Images)

In China, a Tesla(TSLA) Model X made in California costs a staggering 828,100 yuan ($130,800), almost 65% higher than its retail price in the U.S. In the U.S., the latest GM (GM)’s Buick Envision costs $33,995. The price is only 2.5% higher than in China, where it was manufactured.

What’s the major difference? China imposes a 25% tariff on imported vehicles, while the U.S. only has a 2.5% import duty on foreign passenger cars.

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Tesla (TSLA) CEO Elon Musk complained about the tenfold difference on Twitter last week, and later his tweets were singled out by President Donald Trump to show the importance of implementing new tariffs on steel and aluminum. While Musk called for “same import duties” and Trump threatens to tax European auto imports, the impact on American consumers who have a voracious appetite for foreign goods have not been mentioned or addressed.

“Equitable treatment for producers has important repercussions for consumers that self-serving CEOs conveniently ignore,” Stephen Roach, an economist at Yale University wrote in an email to Yahoo Finance. He questions whether it’s fair to tax the low-cost producer, especially when U.S. consumers, with historical low savings rate, want to shop for foreign goods.

The cost of the tariff will be paid partly by consumers

Ford Motor doesn’t sell the made-in-Thailand Ranger in the U.S. because of the 25% tariff on pickup trucks.

China isn’t alone in putting higher tariffs on imported cars in its trading with the U.S. The European Union has a 10% import duty on cars shipped from the U.S., compared with the 2.5% import duty that the U.S. imposes on Europe-made cars.

Therefore, consumers in the U.S. are able to enjoy foreign cars at a lower price compared to its trading partners. The U.S. alone accounts for one-quarter of global purchases of imported cars, while in China less than 5% of cars sold are imported.

GM’s Buick Envision shows the popularity of imported cars. As the first car that GM imported from China since 2016, the model is subjected to the 2.5% import duty when it enters the U.S. However, thanks to lower production costs in China, the car has a competitive price, therefore, it has become the No. 3 selling Buick model in the U.S., with 41,040 sold last year.

The good price on the Buick Envision might be wiped out if the U.S. adopts equivalent tariffs to China. There’s already price pressure in the pickup truck market. The U.S. has been imposing a 25% tax on foreign-made pickup trucks since 1964. This move has attracted Japanese automakers to build factories in the U.S., but it also limits customers’ options and pushes the price of pickup trucks higher. And European manufacturers like Volkswagen don’t even bother selling Amoraks or other light trucks in the U.S. Smaller pickup trucks have been rare as domestic makers turn to producing heavy trucks, which have higher profit margins.

Trump’s announcement on new steel and aluminum tariffs last week has already spurred concerns about the potential burden on consumers. “Make no mistake, this is a tax on American families. When costs of raw materials like steel and aluminum are artificially driven up, all Americans ultimately foot the bill in the form of higher prices for everything from canned goods to electronics and automobiles,” the National Retail Federation said in a statement.

“The concept of fair and equitable trade – and the reciprocity it implies – is a great principle,” said Roach. “But if we are going to apply that principle, we have to be very careful in where we draw the line.”